Ratings agency Fitch had already warned about Canada’s magnificent housing bubble that is even more magnificent than the housing bubble in the US that blew up so spectacularly. “High household debt relative to disposable income” – at the time hovering near a record 164% – “has made the market more susceptible to market stresses like unemployment or interest rate increases,” it wrote back in July.

On September 30, the Bank of Canada warned about the housing bubble and what an implosion would do to the banks: It’s so enormous and encumbered with so much debt that a “sharp correction in house prices” would pose a risk to the “stability of the financial system” [Is Canada Next? Housing Bubble Threatens “Financial Stability”].

Then in early January, oil-and-gas data provider CanOils found that “less than 20%” of the leading 50 Canadian oil and gas companies would be able to sustain their operations long-term with oil at US$50 per barrel (WTI last traded at $47.85). “A significant number of companies with high-debt ratios were particularly vulnerable right now,” it said. “The inevitable write-downs of assets that will accompany the falling oil price could harm companies’ ability to borrow,” and “low share prices” may prevent them from raising more money by issuing equity.

In other words, these companies, if the price of oil stays low for a while, are going to lose a lot of money, and the capital markets are going to turn off the spigot just when these companies need that new money the most. Fewer than 20% of them would make it through the bust.

To hang on a little longer without running out of money, these companies are going on an all-out campaign to slash operating costs and capital expenditures.The Canadian Association of Petroleum Producers estimated that oil companies in Western Canada would cut capital expenditures by C$23 billion in 2015, with C$8 billion getting cut from oil-sands projects and C$15 billion from conventional oil and gas projects.

However, despite these cuts, CAPP expected oil production to rise, thus prolonging the very glut that has weighed so heavily on prices (a somewhat ironic, but ultimately logical phenomenon also taking place in the US).

Then on January 21 – plot twist. The Bank of Canada surprised the dickens out of everyone by cutting the overnight interest rate by 25 basis points. So what did it see that freaked it out? A crashing oil-and-gas sector, deteriorating employment, and weakness in housing. A triple shock rippling through the economy – and creating the very risks that it had fretted about in September.

“After four years of scolding Canadians about taking on too much debt, the Bank has pretty much said, ‘Oh, never mind, we’ve got your back’, despite the fact that the debt/income ratio is at an all-time high of 163 per cent,” wrote Bank of Montreal Chief Economist Doug Porter in a research note after the rate-cut announcement. Clearly the Bank of Canada, which is helplessly observing the oil bust and the job losses, wants to re-fuel the housing bubble and encourage consumers to drive their debt-to-income ratio to new heights by spending money they don’t have.

And what Fitch worried about concerning the housing market in July – that “high household debt relative to disposable income has made the market more susceptible to market stresses like unemployment…” – is now coming to pass.

On Wednesday, Statistics Canada rejiggered its job creation and unemployment numbers by slashing the number of jobs created in 2014 to a mere 121,000. December proved to be even drearier than previously reported: a total of 11,300 jobs were lost.

Now layoffs have begun to cascade through the Canadian oil patch, with 20,000 to 25,000 job cuts already announced so far. They will trigger additional job cuts in other industries. Plus Target’s 17,500 cuts to hit when it leaves Canada. Alberta’s Labor Minister, Ric McIver, told AM 770 on Saturday that the number of unemployed workers would jump by 22%. And he exhorted the government and employers to think long-term about retaining skilled workers for whenever the good times might return.

John Garth Turner, former Member of the House of Commons and now best-selling author in Canada, explained it this way on his always pungent site, The Greater Fool:

The fewest number of people are currently working in Canada since back in 2000, which is a big black eye for a government that slashed interest rates, crushed the dollar, and added $170 billion in national debt over the last six years. Now it doesn’t even have the stones to bring forth a budget, or warn people from scarfing down more debt when the party’s clearly over. Sad.

Said it before, say it again. Easiest money you’ll ever make is to short Canadian banks right now. Even though they’ve lost 15%, they have a very long way to fall, coming off all time highs.

The oil bust has just started in Canada and will lead to the jobs bust, which will lead to the real estate bust, which could very possibly take down the entire banking system due to a massive real estate bubble in Canada.

The banks will be hit by wave after wave, each one getting more severe.

NotSoSure

Feb 1, 2015 at 12:52 pm

I’ve been short the CAD with good result, but currently looking to short the banks as well. Any thoughts on the vulnerable names?

martin

Feb 3, 2015 at 8:16 pm

With all the junk bonds attributed them, I would say the Royal Bank of Canada is a biggie and Scotiabank is next in line.

Dead at 18, buried at 65

Feb 2, 2015 at 3:29 am

Hi Mick,
TIMMMMMBUUURRRRGGGG!!! Mick! You nailed it! 2015/2016 is going to be the easiest money spinner ever made! Shorting stocks, commodities, exchanges, currencies, bonds, couldn’t be much easier. -Even a cat would be successful! Watch out for the dollar though! Don’t touch it!

Petunia

Feb 1, 2015 at 8:41 am

During the worst parts of the real estate bust here in Florida the Canadian snowbirds were buying. They were the only ones with money and seem to have bought at the bottom. That may cushion the blow for them now that their economy has hit a wall.

Jeff

Feb 1, 2015 at 9:41 am

In my current line of work, race technician for a professional auto racing team. We would travel to Toronto for the Grand Prix. I was always amazed at the scale and sheer madness of the high rise construction taking place. I found myself scratching my head thinking, “what the hell is going on here?” These damn Canucks are insane! This surely must be a bubble!

Curious to see if the BOC will follow suite and fire up the printing presses to join the FED, ECB and BOJ in injecting morphine into there lifeless corpses. Or will they just be Canadians an say “Sorry” lol!

mick

Feb 1, 2015 at 12:27 pm

Well Jeff, glad you asked. Like the US, Canada has been playing lots of games in a desperate attempt to create the illusion of growth. Those highrises aren’t being built due to the incredible demand, they’re being built to create a buyer for Canada’s oversupply of commodities, and like I said, to make people think the economy is growing.

Developers cooked up a deal with the government to build those towers, also happening in Vancouver too. Commercial vacancy rates are rising fast, yet they decide to build more towers, illogical unless you know the real reason for them.

Now it’s all falling apart, developers are losing money hand over fist on those buildings, demand is falling off a cliff, and even the lowest rates in history can’t stop this train.

Stupid politicians. Short Canadian banks, get rich off the stupidity of the corrupt status quo.

Dead at 18, buried at 65

Feb 2, 2015 at 3:40 am

Well, Mick,
We should now begin to see a “complete credit collapse” as this ship lists and then rolls itself over – taking everything with it! House prices are not just going to pancake themselves, they are going to flat-line as credit contraction and debt defaults on-mass, nose dives deep into the financial loss abyss.

Neel

Feb 2, 2015 at 12:57 pm

Hi Mick,
Its nice view and I agree on this 100%. Do you know the best way to short them ? via index or ETF ? if so, what are they ?

Bill Sodomsky

Feb 1, 2015 at 11:56 am

The cat’s finally out of the bag! Canada’s as much a failed economic state as it’s southerly neighbor. Canadians are going to get a real dose of reality, the reality that was criminally obfuscated by the banker shills, in particular the so-called Golden (Sachs) Boy infamous Mark (The Carnie) Carney. In 2008, the pristine Canadian Banking Establishment was bailed out to the tune of multi- billions of dollars while the hogs that ran them siphoned off multi-million dollar bonuses. It’s all on the record for those smug Canadians who eventually will be looking for blood. Just read the Canadian rag financial papers and listen to the journalistic ass covering that’s NOW claiming the Bankers should have seen this coming. Give me a break, any journalist claiming to have not seen this coming should be fired on the spot or mauled by the ignorant asses who believed the bullshit spewing from the oligarch controlled Canadian media outlets. Canada ranks right up there with the most highly indebted nations in the world. It’s also a banana republic run by a few mobster families (think Montreal) that control everything from media to banking to corrupt politicians that do their bidding. The same crime families are now promoting Trudeau redux, who da thunk it! In 2010 I uncovered massive fraud pervasive in the Canadian Financial Establishment that was NEVER denied. It was then that I knew it would be only a matter of time before the corpses would bob to the surface. Well whadda you know, the stench of the rotten Canadian financial edifice has surfaced. It’ll look good on us!”

JEHR

Feb 2, 2015 at 12:50 pm

You seem very angry at Canada.

Paulo

Feb 1, 2015 at 12:14 pm

As a Canadian I would like to point out that high priced market areas such as Vancouver and Toronto skew the averages. Additionally, younger employees of the oil boom took on insane debts in the belief that the music would never stop. But not everyone is in debt, in fact, part of the Canadian psyche until very recently was ‘pay off the house as soon as you can and you’ll be free’. In fact, our tax code supports this. Mortgage interest is not deductible, therefore, people have no reason to keep a mortgage. Primary residence sales are not taxed as a capital gain, therefore, speculation and debts are usually less for families.

My own children are a case in point. My daughter is 35 with a solid teaching job. There might be pay adjustments in a severe downturn, but folks need their kids in school one way or the other. Her husband also has a solid job. Together, they make a good middle class income. Their only expenses/debts are some very modest student loans and a smallish mortgage approx. 1.5X their annual gross income for 1 year. They have 1 delightful child. My son, age 30, was making huge money as an industrial electrician in the oil patch….well in excess of $200,000/yr. For years I told him about booms and busts, and he kept his wants and purchases modest. He has a beautiful riverfront home with a reasonable mortgage. He also got out of the ‘patch’ about 8 months ago and now does very well contracting with a friend.

Having gone through a few busts myself, and my kids remembering my struggles in the 80s keeping house/home/family together, they took the example to heart and kept their expectations reasonable. Also, we have always lived well as a family but lived below our means. We drove crappy cars that I fixed, holidays were local camping trips, and our houses were always paid off. This allowed me to work at what I wanted and retire at 57. My daughter’s wedding was at a local church and the reception was at her husbands parents home…a kind of a garden party. The food was awesome and the 50-60 who attended had a blast. Total cost? Maybe $5,000 for everything. My son’s buddy just got married. They bought themselves a new cobra mustang for a mutual present, spent $20,000 + on wedding and reception and an insane $10,000 for wedding pictures to boot. He just got laid off and is now on unemployment. This has been an excellent lesson for my son to see.

All of my friends are in secure economic positions with paid for homes, adequate savings, and retirement incomes.

Please don’t lump an entire nation in the same boat with high living fools whose main source of identity is consumerism. Not everyone lives like that.

regards

GuyFawkesLives

Feb 3, 2015 at 3:19 pm

Why is there always one person who is holier-than-thou, insisting that he is above the fray of his irresponsible countrymen?

Get off your soap box and start looking around you. Because even though YOU may not have been caught up in the fraud, it will take down your country. So, you have been warned…..strap down.

FYI….in the US, people with “very stable jobs” got sh*t-canned when the economy tanked. There is no such thing as a “very stable job” anymore…..even school teachers.

martin

Feb 3, 2015 at 8:23 pm

Listen Guy, one good thing about living in Canada is that we aren’t YouGuys. We have a slightly better idea of home and family and debt and….well common sense, so our hurts and pains are basically flesh wounds and not leg amputations.

GuyFawkesLives

Feb 3, 2015 at 9:59 pm

Oh, let us bow to our saintly “neighbors” to the north. We are in total awe of your greatness.

Viewer

Feb 1, 2015 at 5:26 pm

Garth Turner never got over getting kicked out of his party by Stephen Harper. Goof.

Chris

Feb 2, 2015 at 12:00 am

The housing bubble in Canada has never been driven by local home buyers, almost entirely by Asians looking for a safe bolt hole. Largely independent of the oil industry and what happens in it with the exception of the Prairie provinces. Weather the price of housing collapses in Canada or not depends on what happens in the Asian economies.

Dead at 18, buried at 65

Feb 2, 2015 at 3:44 am

Hello Chris,
I would also add to what you said, as a lot of the demand for new flashy homes were bought by “home flippers” seeking to make serious profit from the exorbitant rise in Canadian house prices!

martin

Feb 3, 2015 at 8:29 pm

Exactly. What Garth was saying in one of his blogs was that Vancouver and Toronto are almost separate from the Canada Housing Bubble for separate reasons, Vancouver for external money forces and Toronto because it’s somewhat well off and supply and demand will still dictate a slightly higher price anyways, even in a countrywide decline.

Ron Peters

Feb 2, 2015 at 8:38 am

My impression, however, is that: a) the lowering of the interest rate was mainly aimed at encouraging business investment, not at increasing consumer debt, and b) a very large chunk of those savings are going straight into the banks pockets, not to either businesses or consumers.

JEHR

Feb 2, 2015 at 12:48 pm

When you say, ” Canada’s magnificent housing bubble [that] is even more magnificent than the housing bubble in the US that blew up so spectacularly,” are you taking into account all the fraud that the American bubble represents?

According to L. Randall Wray:

“The crisis exposed the dangerous and lawless culture prevailing at the world’s biggest financial institutions. We now know, beyond any doubt, that it was fraud from bottom to top. For example, every single step in the mortgage backed securities business was fraudulent. The mortgage originations were fraudulent—with the originators lying to borrowers about the terms, and then crudely doctoring the paperwork to make the terms even worse after borrowers had signed. The property appraisers falsified the home values. The investment banks misrepresented the quality of the mortgages as they were securitized. The trustees lied to the buyers of the securities about possession of the proper paperwork. At the urging of the industry’s creation, MERS, the banks lost or destroyed the property records, making it impossible for anyone to know who owns what and who owns whom. The mortgage servicers “lost” payments and illegally foreclosed using documents forged by “robo-signers”, wrongly evicting even homeowners who owed no mortgage. Now those homes are being sold in huge blocks to hedge funds at cents on the dollar so that they can be rented back to the former owners now living on the streets. It is not too much to say that foreclosure and dispossession was the desired result of what President Bush had called the “ownership society”: move all wealth to the top 1%. I’ve just given one example—you will find a similar level of criminality in every line of business undertaken by the biggest banks, from manipulating bond markets to setting LIBOR rates, from manipulating commodities prices to front-running stocks and trading on insider information. ” http://www.goldmansachs666.com/2013/09/what-did-goldman-sachs-teach-us-about.html

That fraud does not apply to the Canadian “bubble.” Be careful what you imply.

GuyFawkesLives

Feb 3, 2015 at 12:52 am

Are you implying that the Canadian banks have not securitized the home loans? Because if they did, guarantee that there is FRAUD written all over your housing market too. FRAUD knows no borders.

JEHR, I suggest you read the article linked at the end of the 2nd paragraph (“Is Canada Next?….). It will tell you what I mean by “magnificent housing bubble.” It even has a chart that shows you just how magnificent it is compared to the US housing bubble. And it’s glaringly obvious.

TY

Feb 3, 2015 at 3:13 pm

Hello Wolf,

Canadian banks stocks have bounced back strongly after your article was published.

No offense. Isn’t your article a contrarian view that marked the bottom of Canadian banks stocks.

Last week, 30% of my investment were Canadian bank stocks. Today, it is 0%. I made a decision (seems to be wrong by now) to sell all Canadian bank stocks yesterday.

TY, I have no view on Canadian banks. I reported the concerns of others (Bank of Canada, etc.). However, I assume if they ever get in serious trouble, they’ll get bailed out. So no worries. We know that program.

Oil is another story. There are very fundamental issues at play. Even though oil has been soaring over the last few days, the issues are still there.

TY

Feb 3, 2015 at 5:16 pm

Thanks for your reply! Your articles are very informative, especially the topic on oil.